Economists predict "end of great American spending binge" this year

In a message dated 1/25/06 1:14:55 PM, L BUZZELL writes:

<< Copyright © 2006 Agence France Presse.

1 hour, 50 minutes ago

Deepening concern about US deficits and a possible oil supply shock are weighing on a world economy that will be driven largely by China during
2006, a panel of leading economists predicted at the World Economic Forum.

"This is the year to watch out carefully for the end of the great American spending binge," Stephen Roach, chief economist at US bank Morgan Stanley, told the annual meeting of global business and political leaders.

Just hours after China announced that its economy had grown by 9.9 percent in 2005, the panel said Chinese growth was set to continue at the kind of pace that helped it leapfrog over Britain and France to become the world's fourth-biggest economy.

However the four economists cautioned that while Chinese policymakers appeared to be moving to prevent their economy overheating, there was little sign of action in the United States to tackle imbalances.

Roach cautioned that investors appeared to be "plugging ahead irrespective of current account issues and the asset price bubble."

"What's occurring right now in markets and in policy circles is a dangerous degree of complacency. And out of complacency usually comes the surprise that ends up doing the most damage to markets and economies."

The danger lurking behind the high US current account deficit is that foreign investors might begin to lose confidence in the US economy and start withdrawing their assets.

This would cause a fall in the value of the dollar and could lead to a sharp growth-dampening increase in US interest rates.

Roach also said data from the United States indicated that "the property bubble is nearing an end," potentially drying up the last source for the spending spree.

The panel warned that other parts of the world such as Asia -- where savings levels are high -- would need to compensate for a forthcoming slump in US consumption.

"When the US increases its savings -- and it must increase its savings -- that will reduce aggregate demand in the world," said banker Jakob Frenkel of American International Group.

"This is the time the rest of the world must reduce its savings to make up for the slack. That's the tango principle," he added.

Laura Tyson of the London Business School commented: "I think that's understood as a policy issue in China. I don't think it's understood as a policy issue in the United States."

Growth in China fuelled by export demand is set to reach 8.8 to 9.3 percent in 2006, according to Min Zhu, executive assistant president Bank of China.

"I would say Chinese GDP (gross domestic product) is still underestimated," he added, pointing to "millions" of small and medium-sized businesses that were not accounted for in domestic economic data.

"There is still room for China to grow."

Highlighting a "fundamental change in the centre of gravity" in the world economy, Frenkel said national savings in China amounted to 45 percent of GDP compared with 10 percent in the United States.

"You do not need to be a nuclear scientist to ask where the growth will continue in the future," he added, also pointing to China's booming imports from the rest of Asia, which are fuelling the regional economy.

French Finance Minister Thierry Breton acknowledged China's stature as he arrived in the Swiss Alpine resort of Davos.

"I think the big story is that China is moving up," he told journalists.

"We tried to be prepared in France for many years -- China is an extremely important industrial partner in this new global environment."

Concern also focused on the potential for an energy shock caused by bottlenecks in supplies due to a shortage of capacity or political problems.

"The real question is what is the probability of a supply shock on the energy front," Laura Tyson of the London Business School underlined, amid consensus on the durability of high oil prices.

The economists admitted they were largely "in the dark" on oil due to international tensions over Iran, a rebellion in Nigeria and the potential for a repeat of Hurricane Katrina, which temporarily shut down extraction in the Gulf of Mexico. >>

Informant: Hopedance


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